Itaú BBA - MEXICO – Banxico minutes: disagreement on further easing

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MEXICO – Banxico minutes: disagreement on further easing

October 8, 2020

Available room for maneuver will be data dependent

Board members disagree on the available room for further monetary policy easing. Two members considered that with the most recent cut in the policy rate, the space for further monetary policy easing has probably been exhausted. On the other hand, two board members think that monetary policy easing should slowdown, but there is still space for additional rate cuts. One of these members, considered that the policy rate should be taken at least to levels equivalent to 2009, when monetary policy real interest rate was taken to negative levels. Finally, other member seemed more balanced, and considered there is limited available room for maneuver, and that future policy decision will depend on the evolution of factors that influence inflation forecasts, so not completing shutting the doors for additional easing.

Likewise, there is disagreement on the balance of risks for inflation. Some members agree on an uncertain balance of risk for inflation. On the other hand, one member mentioned that upward risks for inflation have increased, while other member considered that risks are balanced and there are no visible factors that could significantly affect the foreseen trajectory of Banxico’s inflation forecast path. 

Regarding the macro-financial environment, most members pointed out that the situation of public finances is a risk factor. Some members highlighted the risk that the depletion of the stabilization fund resources imply for 2021 fiscal outlook. Moreover, most members expressed their concern about PEMEX financial situation, with some members highlighting the possibility that the state firm would require additional fiscal support. 

We expect Banxico to keep its policy rate on hold at 4.25% during the rest of the year. As the current high inflation is likely transitory (associated to supply/demand shock due to the outbreak), we expect board members to resume the easing of monetary policy next year (we expect policy rate to reach 3.50% next year) as a wide negative output gap and a stronger currency would bring inflation down. 

Joao Pedro Resende
Julio Ruiz

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